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Last Updated: Tuesday, 17 October 2006, 23:13 GMT 00:13 UK
Will the economy help the Democrats?
By Steve Schifferes
BBC News economics reporter

US President George W Bush visiting a factory
The state of the economy has become a political, not just economic, issue
The US economy is slowing down after a strong period of growth. But will it affect the voters in the mid-term elections?

For many years, the conventional political wisdom was that US elections - especially presidential elections - were won and lost over the economy.

But the Democrats lost the 2000 election despite a strong economic performance in the Clinton years, and in 2004 the issue of terrorism and Iraq - as well as social and religious issues - took centre stage.

The recession in the homebuilding sector is likely to be longer lasting and more severe than some expect
Paul Ashworth, senior US economist, Capital Economics

Now, with terrorism no longer such an advantage for the Republicans and economic growth slowing after two years in which it powered ahead, will the economy help the Democrats?

Polling concerns

The polling evidence suggests that economic issues are still far from the core of most voters' concerns.

In the latest New York Times/CBS News poll, conducted between 5 and 8 October, only 7% of voters said the economy was the most important issue facing the country, as opposed to 27% who cited the war in Iraq.

And 60% say that the economy is in good shape.

us growth
Looking to the future, however, twice as many voters expect the economy to get worse as predict it will get better - 31% to 19% - while 49% say it will stay much the same.

And by a margin of 57% to 34%, voters generally disapprove of the way President Bush is handling the economy. By a similar margin, 51% to 36%, they think the Democrats are more likely than the Republicans to ensure a strong economy.

Growing worries

For voters, three key issues dominate their view of the state of the economy: petrol prices, house prices, and jobs.

US petrol station
Petrol prices peaked at nearly $3 per gallon

The arrival of petrol at $3 a gallon over the summer signalled a distinct downturn in President Bush's economic approval rating.

US voters appear to be particularly sensitive to the level of petrol prices - and not just because they are heavily dependent on their cars.

The high prices at the pump also bring back memories of US dependence on foreign oil, and the high inflation, of the 1970s.

Adding to the gloom has been the dramatic slowdown in the housing market, which has undergone a boom in the past few years.

Housing slump

But since the summer house prices have slumped, reducing the 'feel-good" factor that has been boosting consumer spending.

The slump has been driven by higher interest rates after the US central bank, the Federal Reserve, raised interest rates 16 times in an attempt to curb inflation.

What we are seeing is the calm before the storm
Robert Reischauer
Ex-director, Congressional Budget Office

Economists are divided as to how far the housing slump will affect the broader economy, but it could have broader repercussions for spending and investment.

"The recession in the homebuilding sector is likely to be longer lasting and more severe than some, including the Fed, are hoping for," says Paul Ashworth, US economist at Capital Economics.

Finally, many Americans are fed up because the economic boom of the last few years has not trickled down to enough people.

us unemployment

Real wages for most Americans have barely changed in the past five years, while productivity has soared.

And unemployment has only come down slowly.

Nearly half of voters (46%) say they have just enough household income to save and buy extras, and 17% say they do not have enough, compared to 36% who say they can afford more.

Even Republican supporters are worried.

GM production line in Michigan
Wage growth has been modest despite the growing economy

"You have a portion of the middle class that doesn't believe it's benefiting from good economic news," R Bruce Josten of the US Chamber of Commerce told the Washington Post.

Of course, in past elections many of these poorer, dissatisfied voters were less likely to turn out and vote.

If the Democrats can motivate more of them to vote this time, it could have a major effect on the electoral outcome.

Taxes and budgets

Underlying the economic debate is the continuing issue of fairness.

The centrepiece of Mr Bush's economic policy in his first term of office was a series of tax cuts, which mainly benefited those at the top of the income scale.

This led to a huge budget deficit, exacerbated by the costs of the Iraq war.

The administration believes that the cuts also stimulated the economy, and the budget deficit they created was temporary.

Mr Bush says that the recent falls in the size of the budget deficit - driven by higher tax revenues - are a vindication of his strategy.

But many experts, including the non-partisan Congressional Budget Office, project the budget deficit to rise in the future - especially if the Bush tax cuts are made permanent.

US petrol prices

"What we are seeing is the calm before the storm," says former CBO director Robert Reischauer.

"Everyone knows that the current revenue and spending structures will unsustainable as the 'baby boom' generation begins to enter retirement."

For one key part of the coalition which makes up the Republican party, there is a particular source of unease and disillusionment.

Fiscal conservatives, those genuinely committed to "small government", have watched in dismay as Congress has refused to rein in spending on "pork-barrel" projects despite the deficit.

Their disillusionment could deprive the party of both voters and - more importantly - funding in the run-up to the election.

Fears and protectionism

Mr Bush has been strongly in favour of free trade during his term of office, and a key supporter of the recently-suspended round of world trade talks.

But the growing US trade deficit with the rest of the world has fuelled protectionist pressures, which some Democrats are keen to exploit.

Unlike the budget deficit, the current account deficit - the broadest measure of the gap between imports and exports of goods and services - has continued to soar.

In the first eight months of 2006 it reached almost $800bn, a new record.

US trade deficit

Many US politicians blame China for the growing deficit, and have called for a revaluation of the Chinese currency, the yuan, to make Chinese goods more expensive.

But many economists believe that, in the longer term, there could be painful adjustments needed to bring the world trade system into alignment, including a major devaluation of the US dollar.

This could boost inflationary pressures and slow down the economy further.

"The deteriorating current account and budget deficit are the key medium-term risks for the economy and financial markets," says Lehman Brothers stockbrokers in their global economic monitor.

During the election campaign, neither party is focused on reducing the trade gap.

But it may be that whoever wins the election finds that this issue turns out to be the most important of all.

budget deficit

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